Market Efficiency

Question 1

Define ‘allocative efficiency’

Answer 1

Producing the combination of goods mostly wanted by society, answering ‘what to produce’ in the best way.

Question 2

Define ‘productive efficiency’

Answer 2

Involves production with the fewest possible resources, answering ‘how to produce’ in the best way.

Question 3

Define ‘consumer surplus’ (CS)

Answer 3

Derived whenever the price a consumer pays is less than they are prepared to pay.

Question 4

Define ‘producer surplus’ (PS)

Answer 4

Additional private benefit to producers, in terms of profit gained when the price they receive in market is more than minimum they would be prepared to supply for.

Question 5

Define ‘social community surplus’

Answer 5

Total benefit available to society from an economic transaction/situation.

Question 6

CS

Answer 6

CS = WTP - P

CS is the amount a buyer is willing to pay minus the buyer actually pays.

Question 7

PS

Answer 7

PS = P - cost

PS is the amount a seller has paid for a good minus seller’s cost.

Question 8

Allocative Efficiency

Answer 8

MC = MB
Market Equilibrium
Therefore, maximum social surplus and welfare.